Central Bank to restrict trust entities in deposit facilities

STARTING July next year, trust entities can no longer access deposit facilities as investment outlets to keep the facilities purely as tools for liquidity management, a development that could push the term deposit facility (TDF) yield rates higher.

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. noted the change is good for the industry as “it will encourage trust entities to grow by developing expertise in fund management, instead of simply being passive and placing funds with the BSP to earn a decent return.”

This move is also expected to help deepen the domestic capital market, which in turn could help spur economic activity, BSP said.

“In keeping with the nature of the BSP deposit facility as a monetary policy instrument for managing domestic liquidity in the financial system, the Bangko Sentral decided to discontinue the access of trust entities to the BSP overnight deposit facility (ODF) and term deposit facility (TDF),” it said in a statement on Thursday.

The new rule takes effect on July 1, 2017 but the BSP said the Monetary Board (MB) approved a phased implementation of the restriction to ensure an orderly transition.

“A Memorandum Guideline following the MB approval will be issued providing among others that all ODF and TDF placements of trust accounts as of 30 September 2016 shall be reduced to 50 percent and 30 percent by 31 December 2016 and 31 March 2017, respectively,” it explained.

By June 30 next year, any remaining ODF and TDF placements will be terminated.

“The latest move on the access restriction is part of the BSP’s continuing effort to rationalize the use of the deposit facility as a liquidity management tool,” it said.

Bank of the Philippine Islands (BPI) Vice President and lead economist Emilio Neri Jr., said the new regulation means that trust companies will have to deploy their funds elsewhere including the local bond and equity markets.

“TDF rates could also rise incrementally as a result,” Neri emphasized.

The BSP said it has been in consultation with the trust industry to prepare the market for the new rule.
Liquidity conditions remain manageable and supportive of non-inflationary growth amid the continued expansion in domestic liquidity or M3, central bank data showed.

In 2012, the BSP issued a guideline clarifying that the special deposit account (SDA) facility (the forerunner of the ODF and TDF) is a liquidity tool and should not be made available for opportunistic investment activities.
In keeping with the contractual nature of the deposit facility, banks and trust entities were not allowed to invest in the facility using funds from non-resident sources, it said.